As health care costs continue to rise, more and more employers are offering Health Reimbursement Arrangements (HRAs) as stand-alone employee health benefits. Employers must follow specific rules when offering an HRA to employees.
Here's an overview of the most important health reimbursement arrangement rules.
HRAs are very flexible, allowing an employer to design the health reimbursement arrangement from scratch to meet the exact needs of the company and the employees. The employer makes the determination on what types of IRS-qualified health care expenses can be reimbursed through the HRA plan. See a full list of HRA eligible expenses. An employer may decide to limit certain type of expenses by expense category, which includes the removal (or inclusion) of expenses such as dental, vision, and pharmacy and the placement of a cap on the dollars that may be used for each expense category. For example, some common plan designs include the following:
1. Deductible HRA: HRAs designed to only reimburse medical expenses that apply to an underlying health plan's deductible.
2. All Medical Expense and Insurance Premium HRA: HRAs designed to reimburse all out-of-pocket medical expenses including health insurance premiums.
3. Limited-Purpose HRA: HRAs designed to cover specified expenses only (such as dental or vision).
With an HRA, unused fund amounts may be carried over from year to year. Employers have full control over how the roll-over is managed. For example, the employer determines whether all or only a portion of unused funds carries over to the next year. Similarly, the employer may determine that all fund balances reset to zero after the close of a HRA plan year.
HRA reimbursement requests must be substantiated. The most common documentation used for HRA substantiation is the EOB (Explanation of Benefits) statement provided by a health insurance company. If an EOB is not available, a copy of a receipt or bill identifying the date of service, amount of service, and the provider of service is typically used as documentation.
The reimbursable medical expenses should be outlined in the health reimbursement arrangement plan document. Acceptable expenses include medical, dental, vision and pharmacy costs. Additional qualifying expenses include premiums for health insurance payments and expenses for long-term care.
Employers that offer health reimbursement arrangements must adhere to federal rules regarding HRA participation and eligibility. An employer cannot exclude employees from health reimbursement arrangements based upon personal characteristics (e.g. race, age, national origin, religion, or gender). The employer can base HRA eligibility on bona-fide job criteria such as hours worked per week, job classifications and date of hire.
All contributions to an HRA must be funded by the employer. An HRA cannot be tied to any reduction of employee compensation. There is no limit on the amount an employer may contribute to an HRA.
Distributions from an HRA may be made to current and former employees, spouses and dependents of those employees.
Distributions for qualified medical expenses from an HRA are not included in the taxable income of employees. No federal income taxes or employment taxes are payable on HRA distributions.
HRAs are subject to COBRA. Employees experiencing a qualified event should be given the opportunity for continued participation in the HRA offered by the employer. If an employee experiences a COBRA qualifying event and makes a COBRA election for the HRA, the employer determines the premium amount the employee must pay to continue participation.
An HRA plan is a self-funded health plan and is governed by HIPAA Privacy Rules. In order to administer an HRA, the entity processing employee claims receives protected health information (PHI) that is protected by HIPAA. Employers that offer a fully-insured health plan and sponsor an HRA often overlook their HIPAA Privacy obligations and rely on the insurance carrier to comply with the HIPAA Privacy Rules. HRA compliance obligations, however, rest with the employer. Employers that do not comply can be subject to civil penalties of up to $100 per violation.
An employer may choose to offer a Flexible Spending Account (FSA) plan in conjunction with an HRA. In a situation where an incurred medical expense could be reimbursed from either the FSA or HRA, the employer or plan administrator must determine the "ordering rules" which determine which plan (FSA or HRA) the expense shall be reimbursed from first.